TRiver/FlickrAug. 23 ( Bloomberg) -- The number of U.S. homeowners who owe more on their mortgages than their houses are worth fell by about 400,000 in the second quarter as prices rose and properties were lost to foreclosure.

About 15.3 million homeowners, or almost 31 percent of those with a mortgage, had negative equity as of June 30, according to Seattle-based Zillow Inc. That was a decline of a 0.5 percentage point from the first quarter, the real estate information service said today.

"It's a positive signal," Zillow Chief Economist Stan Humphries said in a telephone interview. "Negative equity has definitely gummed up the workings of the housing market."

Underwater homeowners have a higher foreclosure rate and a harder time relocating, because they would lose money in a sale, Humphries said. The problem is greatest among borrowers under age 40, about 48 percent of whom owe more than their homes are worth. That's slowing the housing recovery by shrinking the inventory for first-time buyers and reducing demand for move-up homes, Humphries said.

Total negative equity was $1.15 trillion in the U.S. at the end of the second quarter, a $42 billion decline from three months earlier, according to Zillow.

Sales of existing homes rose to an annual pace of 4.47 million in July, the National Association of Realtors reported yesterday. The median price was $187,300, a 9.4 percent increase from a year earlier and the biggest 12-month gain since January 2006. There were 2.4 million homes listed for sale, putting a lid on the number of transactions, said Lawrence Yun, chief economist for the group.

'Notable Shortages'

"The total supply of housing inventory appears to be balanced in historic terms, but there are notable shortages in the lower price ranges which are limiting opportunities for first-time buyers," Yun said in a statement yesterday.

Home prices are about 33 percent below the June 2006 peak and similar to the April 2003 level, according to the S&P/Case- Shiller index of values in 20 major cities. Zillow, which tracks home prices in more metropolitan areas, estimates that U.S. prices are about 22 percent below their peak, back to levels from early 2004, Humphries said. That means the majority of people who bought a home in the past eight years would lose money if they sold today, he said.

Homeowners 30 to 34 years old had the highest rate of negative equity, with 50.8 percent of their properties underwater as of midyear, followed by 47.6 percent for those 25 to 29, and 46.3 percent for borrowers 35 to 39, Zillow said. The "typical age" for first-time buyers last year was 31, according to a November report by the National Association of Realtors, while the typical age for repeat buyers was 53.

Price Appreciation

Home values are likely to appreciate at a pace of 2 percent to 3 percent annually for the next decade, meaning it will take 10 years for prices to return to their pre-crash peak, Humphries said.

In Las Vegas, 68.5 percent of homeowners were underwater as of June 30, the most of 30 metro areas analyzed by Zillow. That was down from 71 percent in the first quarter.

Phoenix had the biggest decline in its negative-equity rate, falling 3.9 percentage points to a 51.6 percent, followed by Miami, which dropped 2.7 percentage points to 43.7 percent. The rate in Philadelphia, the only of the 30 cities with an increase, rose 0.4 percentage point to 25.4 percent. Philadelphia prices fell 0.8 percent in the second quarter from the first, Humphries said.

Foreclosed Properties

While price gains accounted for most of the home-equity improvement, the number of underwater borrowers also fell as banks seized properties with delinquent mortgages and let owners sell homes for less than what's owed on them through short sales, Humphries said.

Lenders repossessed almost 160,000 homes in the second quarter, down from about 180,000 in the prior three months, according to RealtyTrac Inc. More than 100,000 short sales were completed in the most recent quarter, according to Daren Blomquist, vice president at the Irvine, California-based firm.

Zillow compiles its negative-equity report using its home- value index, outstanding mortgage debt and lines of credit associated with properties.

--Editors: Daniel Taub, Christine Maurus

To contact the reporter on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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